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ESOP Sponsors: Be Careful What You Say in Your Summary Plan Description

Corey Rosen

June 30, 2011

(Corey Rosen)

The Supreme Court's CIGNA v. Amara Decision May Look Like a Win for Employers, But Opens Up New Avenues for Employees as Well

To read the headlines on the Supreme Court decision in CIGNA v. Amara, No. 09-804 (U.S. May 16, 2011), it might seem employers had won a big victory. The court had ruled that a conflict between language in a summary plan description (SPD) and the plan document itself should be resolved in favor of the plan, at least under one part of ERISA. But the court's ruling was far more complex, finding that employees can still seek equitable and monetary relief if they can show damage resulting from the miscommunication under other sections of ERISA.

The issue in Amara was the conversion of Cigna's defined benefit plan to a cash balance plan. Amara charged that the SPD inadequately disclosed the change, causing potential harm to participants. A district court agreed and reformed the plan. An appellate court affirmed that decision. The Supreme Court said that the lower courts had erred because the plan document itself governed and reversed the decision.

In this case, the court was ruling only on issues arising under Section 502(a)(1)(B) of ERISA, which allows participants to recover benefits due them under the terms of the plan. Here, the court said, the terms of the plan, not the SPD, are determinative. Two other routes for action, however, are ERISA Section 502(a)(2) which allows participants to seek recovery on behalf of the plan itself against fiduciaries for breaching their duties or Section 502(a)(3), which allows the pursuit of appropriate equitable relief (generally changes in the design or operation of the plan) to redress violations of ERISA or the terms of the plan.

The court said Section 502(a)(3) could potentially be relied on for conflicts between summary documents and the plan. Plaintiffs would have to show the mistakes were material and intentional and that there was detrimental reliance on the documents, not just likely harm. In that case, equitable relief could include reformation of the plan as well as monetary relief through a "surcharge," a concept that lower courts have generally not accepted in the past. The surcharge concept in particular opens up a possible new avenue for claims against fiduciaries.

ESOP sponsors should not lose any sleep over this case, however. There are vanishingly few ESOP cases on this issue. If your SPD is carefully reviewed (or prepared) by a qualified advisor and updated and distributed as required, you can rest comfortably at night.

The SPD and Communicating the Plan

Legal issues aside, let's be honest. Almost no one ever reads an SPD. When you learned to play a new board game, did you read the rules first? Did you do the tutorial or read the supporting material when you learned to use new software before you started? You are a rare individual if you did. Most of us (including me) start playing the game or using the technology and then check in on supporting material when needed. So don't confuse giving out an SPD with explaining a plan. For that, you need to do a mix of things, including meetings, FAQs on your Web site, short bites of explanation of various aspects of the ESOP rules in your newsletter or periodic handouts, an employee ESOP guidebook written in easy-to-follow English that just hits the basics, etc. Make it clear that these communications are not the ultimate source, that the SPD and the plan itself are what really set out the rules and should be relied on. By doing all this, you can explain the ESOP and stay out of trouble as well.

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